Cases in Bank management

CASE FOR DISCUSSION

KRISHNA STEELS

Murali Krishna, proprietor of Krishna Steels, was in deep thought. He was convinced that there would
be substantial increase in sales of his firm over the next couple of years. However, he had to look for
borrowed funds, since he seemed to be perpetually short of cash, in spite of good profits. At the end of
the first quarter of 2009, his borrowings from Smaller Bank stood at Rs 3.99 crore, and he was
doubtful if the bank would agree to a significant increase in the present credit limit of Rs 4 crore.
Krishna was just managing to stay within the credit limit granted by the bank by relying heavily on
credit from his suppliers.

Krishna had discussed his problem with Mr Jai, who headed the city branch of Larger Bank. Jai had
tentatively agreed to raise the credit limit to a maximum of Rs 7.5 crore. Krishna thought that a credit
limit of this size would improve his firm’s cash position and profitability. However, Jai made it clear
that the sanction of credit limit by his bank would be based on investigation and appraisal by his team
of credit officers, and that Murali would sever his relationship with Smaller Bank in case his loan was
sanctioned by Larger Bank.

The following points are excerpts from the credit officers’ report to Jai:

1. Krishna Steels was founded in 1995 as a partnership between Murali Krishna and his father,
Hari Krishna. The business was located on land owned by the firm, in the growing suburbs of
a large city in South India. The firm also owned four large storage buildings erected on this
land.

2. The firm, which operated largely in South India, was involved in distribution of steel and steel
products.

3. In 2007, Murali bought out his father’s interest in the business for Rs 2 crore. In order to give
time to Murali to arrange for financing, Hari agreed to take the payment in semi annual
instalments beginning March 31, 2007, with annual interest of 11%.

4. In addition to owning the steel business, Murali owned a house in an upscale locality, jointly
with his father. The house was mortgaged to Smaller bank. Apart from the house and a life
insurance policy, Murali had no sizable assets in his name.

5. Murali, an energetic man in his early fifties, was well known in the trade for his integrity and
business acumen.

6. Sales and profits were growing year after year. In 2009-10, sales were expected to touch Rs
55 crore. There was a ready market for the firm’s products and the prospects of future sales
were favourable, since construction activity was increasing rapidly.


Prepared by Padmalatha Suresh for class discussion only.

Copyright ©2014 Padmalatha Suresh

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Cases in Bank management

7. The firm employed 20 people, of which half the number worked in the steel yard, 2 drove the
firm’s trucks, and the remaining employees assisted in the office and in sales. Almost 80% of
the employees had been working with the firm since inception.

8. All the sales were not cash sales. Similarly, suppliers gave credit for purchases. The usual
terms of purchase in the trade provided for a discount of 2% for payments made within 10
days of the invoice date. In other cases, payment for purchases had to be made within 30 days
of purchase at the total invoice price. Over the last two years, Mr Murali seemed to have
hardly availed of the purchase discount, since he always seemed to be short of funds.

The financial statements for Krishna Steels are given in Exhibits 1 and 2

The credit officer also commented on the key aspects of the firm’s financial performance,
particularly the growth in sales, current assets and current liabilities, and paid attention to key
financial ratios.

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QUESTIONS:

1. WHY WAS KRISHNA STEELS SHORT OF FUNDS DESPITE PROFITABLE

OPERATIONS?

2. SHOULD LARGER BANK LEND TO KRISHNA STEELS?

3. IF THE BANK DECIDES TO LEND, HOW MUCH SHOULD IT LEND? SHOULD IT

IMPOSE ANY CONDITIONS FOR LENDING?

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EXHIBIT 1: Krishna Steels Balance sheet 2007-2009

[Rs in Lakhs]

Description FY 2007 FY 2008 FY 2009

LIABILITIES

Net worth 504 372 449

Term loan from bank 140 120 100

Payable to Hari Krishna - 200 100

Trade creditors 213 340 503

Accrued expenses 42 45 75

Working capital loan - 60 390

from bank

Term loan current 20 20 20

portion payable to bank

TOTAL LIABILITIES 929 1157 1637

ASSETS

Cash 43 52 56

Receivables 306 411 606

Inventory 337 432 587

Net Fixed assets 243 262 388

TOTAL ASSETS 929 1157 1637

NOTES:

1. The bank loan for working capital has been availed at an interest of about 11% [floating rate]

2. Interest on term loan fixed at 10% on outstanding balance.

3. Both loans are secured by Krishna Steels’ fixed and current assets

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Cases in Bank management

EXHIBIT 2: Krishna Steels Income statement [FY 2007- FY 2009]

[Rs in lakhs]

Description 2007 2008 2009

Net sales 2921 3477 4519

Cost of goods sold

Opening inventory 330 337 432

Purchases 2209 2729 3579

Closing inventory 337 432 587

Total COGS 2202 2634 3424

Gross profit 719 843 1095

Overheads [including 622 717 940

Murali’s salary]

Interest 23 42 56

PBT 74 84 99

Tax 14 16 22

PAT 60 68 77

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